Oil spike fuels fresh growth concerns Stocks, rupee slip on oil slick
Tensions in the Gulf add to economic worries even as Saudi Aramco assures India it will honour supply contracts in spite of production cuts
NEW DELHI/MUMBAI: A record gain in crude oil prices could further aggravate India’s fiscal situation and make it tougher for the government and the central bank to effectively combat a slowdown in economic growth.
With drone attacks on Saudi Aramco’s facilities causing the biggest-ever disruption in oil suppliers, India is preparing to stem the impact of the price surge. Saudi Aramco has, however, assured India that it will honour its supply contracts despite the production cuts, Indian government officials said on condition of anonymity.
International benchmark Brent crude futures soared as much as 19.5% to $71.95 per barrel. Some traders are speculating that oil prices may cross the $100 mark again. Crude prices hit a record $147 per barrel in July 2008.
The surge in oil prices comes at a time when the Narendra Modi government is trying to boost the economy after gross domestic product (GDP) growth slumped to the slowest in more than six years. An increase in inflation stoked by higher fuel prices will also leave less space for the Reserve Bank of India (RBI) to cut interest rates to combat the slowdown.
“India’s crude imports averaged 4.5 million barrels per day over the first seven months of this year, of which close to 20% were imported from Saudi Arabia. As such, India is vulnerable to prolonged lower crude supplies from Saudi Arabia even though the country has some SPRS (strategic petroleum reserves) and commercial crude stocks as cushions in the short term,” Jy Lim, an oil market analyst at S&P Global Platts, said in an emailed statement.
India imports more than 80% of its oil requirements and around 18% of natural gas.
Every dollar increase in the price of oil raises the import bill by ₹10,700 crore on an annualized basis. India spent $111.9 billion on oil imports in 2018-19.
“Of the cargo contracted from Saudi Aramco for September, we have already received a major part. We have been told that they will be using other ports to ship the balance, though the grades may vary,” an Indian government official, one of those cited earlier, said on condition of anonymity.
“Saudi Aramco updated us that our oil cargo was successfully loaded the day before. We are waiting for that to arrive and also watching the situation,” said R Ramachandran, director (refineries) at state-run Bharat Petroleum Corp. Ltd. The company has booked successive cargoes of 2 million tonnes on September 17 and September 22 from Saudi Aramco.
“In case of an extended disruption, the two comparable events are the Iranian Revolution of 1979 and Iraq’s invasion of Kuwait in 1990. India suffered in both cases. In the case of the Gulf War, there was added impact of Indian workers returning home, worsening India’s balance of payments,” said Amit Bhandari, fellow (energy and environment studies) at Mumbai-based think tank Gateway House. The geopolitical event has raised fears of a rise in fuel prices in India, which in turn may stir demand for return of state control on fuel pricing.
Meanwhile, in a separate development, Saudi Arabia officials are discussing delaying Aramco’s initial public offering as attacks on the company’s oil facilities have drastically reduced their output, the Wall Street Journal reported on Monday, citing people familiar with the matter.
Shreya Nandi, Gireesh Chandra Prasad and Reuters contributed to the story. MUMBAI: India’s rupee weakened and stocks declined after drone attacks on Saudi Arabia’s oil facilities sent crude oil prices surging by the most on record.
Higher crude prices have stoked inflation and fiscal slippage concerns as India imports more than 80% of its oil requirements. Crude oil prices saw their biggest intraday gain on Monday, soaring nearly 20%. The attacks on Saudi Aramco’s oil facilities removed almost 5% of global supply.
On Monday, the Indian rupee weakened 0.94% to close at 71.60 a dollar and the BSE Sensex fell 261.68 points, or 0.7% to 37,123.31.
In Asia, shares on Hong Kong’s Hang Seng index shed about 1%. Japan was closed for a holiday.
The drone strikes have added to the trade war-related uncertainties and deteriorated market conditions globally, said Gaurav Dua, head of capital market strategy and investments at Sharekhan by BNP Paribas. Indian stocks were also impacted by the surge in crude prices, with equity investors ignoring the initiatives announced by the government on Saturday to support the housing sector and boost exports.
Analysts said the heightened tension in West Asia will have an adverse impact on inflation. “Any sustained increase in oil prices is always going to be a cause of concern for India, considering we import more than 80% of our oil requirements,” CARE Ratings said in a note on Monday. India imported 4.5 million barrels a day (April-july) of crude, while its import dependence based on consumption has risen to 84.9%, it said.
Crude prices rising by a dollar would increase India’s import bill by roughly $1.6 billion a year, according to CARE Ratings estimates. “We can maybe foresee an increase in petrol and diesel (prices) in the coming few days, depending on how the oil markets react to the reduction in supply,” said CARE Ratings.
Analysts said the spike in prices, even though temporary, will be negative for refiners and distributors of oil and gas. “We do not rule out a possibility of moderation in marketing margins on auto fuels—a $10/bbl rise in global crude and product prices may require OMCS (oil marketing companies) to increase retail price of diesel and gasoline (petrol) by ₹5-6/litre in the following fortnight. Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss,” Kotak Institutional Equities said in a note on Monday.
Government bond prices also slipped on Monday due to the surge in global crude prices.
The yield on the 10-year Indian government bond rose nine basis points to 6.707% compared with the previous close of 6.637%.
Bond yields and prices move in opposite directions.